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“…If U.S. ethanol consumption were somehow banned, then U.S. corn prices would drop to an average of $2.67/bu.,” says Bruce Babcock, Iowa State University Cargill Chair of Energy Economics. “But there is no mechanism for implementing a ban on corn ethanol production. The only tool that the U.S. government has at its disposal to lower corn prices is to waive the mandate.”

Babcock conducted a July study on the impact the current drought would have on crop and biofuel prices. He conducted it again with the lower corn productions estimated in the August World Agriculture Supply and Demand Estimates (see "Crop Progress Report Paints Dismal Picture"). Part of that explores the impact of a waiver for the Renewable Fuels Standard (RFS).

“Two findings stand out,” Babcock says. “The first is that the flexibility built into the RFS allowing obligated parties to carry over blending credits (RINs) from previous years significantly lowers the economic impacts of a short crop, because it introduces flexibility into the mandate. The 2.4-billion-gal. amount of flexibility assumed in this study lowers the corn price impact of the ethanol mandate in this drought year from $2.49/bu. to $0.58/bu. This means that waiving would lower corn prices by about 7.4%.

“The second finding is that if the current price of ethanol relative to gasoline accurately reflects the value of ethanol to blenders, then the price of ethanol will be supported at quite an attractive level as long as ethanol quantities are not pushing up against the blend wall. This implies that ethanol plants will be a strong competitor for corn even without a mandate…”

Similarly, a study from Purdue University suggests corn prices wouldn't necessarily moderate if the federal government's corn ethanol mandate were temporarily suspended. The report, "Potential Impacts of a Partial Waiver of the Ethanol Blending Rules", suggests that corn prices could fall under some scenarios should the U.S. Environmental Protection Agency grant a partial waiver of the corn ethanol provision of the RFS, but only under certain market conditions.

“The range of impact of an RFS waiver goes from zero to $1.30/bu. for corn,” says Wally Tyner, a Purdue University energy policy specialist and the report's lead author.

In the Purdue study, Tyner, along with fellow ag economists Chris Hurt and Farzad Taheripour, looked at future corn and ethanol prices with and without an RFS waiver, how RINs and crude oil prices could factor in ethanol use, and what might occur if the drought worsens.

“If corn prices remain high, which seems likely, and crude oil remains at $100/barrel or lower, then reducing the RFS could reduce the demand for ethanol and, consequently, the demand for corn,” Tyner says. “If the waiver resulted in less demand for ethanol that would, in turn, lead to lower corn prices than would have existed without the waiver. It also could lead to more ethanol plant closings – at least temporarily.”

Under its normal schedule, the EPA has until October to gather information on the extent of any economic harm done by the original RFS level and to decide if it will issue a waiver. For consumers, the decision could affect what they pay for fuel and food.

Should a waiver lead to reduced ethanol use, the EPA could have an influence on who bears the brunt of the drought-related corn losses, Tyner says.

“The total amount of harm from the drought is in the tens of billions of dollars,” Tyner explains. “The EPA cannot change the loss. It can only potentially redistribute it among the affected parties: ethanol producers, livestock producers, corn growers, and domestic and foreign consumers.”

Discuss this Article 8

I wrote the ethanol article below. You are free to edit and publish it however you wish

For the Ethanol Mandate, the Real Issue is Speculators
by Bobby Fontaine

The problem is not so much grain supplies but the prices going so high that third world countries and the food relief organizations that support them can't afford to feed their people anymore. This leads to political unrest and death all over the world, like last years "Arab Spring" being a direct result of rising grain prices caused by federal ethanol mandates. Ethanol supporters can defend high grain prices by showing that ever since ethanol has placed higher demands on corn markets, more corn has been grown to meet it. That however doesn't change the fact that the reason grain prices are so high even though there is ample supply is speculators. And the only reason speculators feel confident enough to risk billions of dollars to drive up grain prices is because federal biofuel mandates insure higher than normal demand on corn, and soybean for biodiesel.

Higher demand for soy and corn, along with being able to sell it for higher prices, causes farmers to choose to grow them over other crops, which puts pressure on the supply side for all related food markets, including meat producers who use grain for animal feed. This gives speculators a field day of betting that all commodities markets will rise. This in turn forces the cost of everything we eat to unrealistically high levels. But since we have such a strong economy, we won’t starve. This however does keep us from being able to make our economy stronger, which is causing a lot of people to become unemployed and stay that way. In third world countries, higher grain prices means they don’t eat, which in the long run, the unrest that follows costs us greatly, to say nothing of the humanitarian aspect of what we’re doing to them.

No reason for starvation

What I’m saying is we will have enough grain to supply all the markets in need, hopefully with next year bringing in a better crop so we can re- supply depleted stores. But speculators are forcing prices up to unrealistic levels so we can no longer afford to buy them without a great deal of pain. This way they make money at everyone’s else’s expense, including their own since they are human beings and will suffer through whatever they cause for the rest of us. This is to say nothing of the fact that they will also have to help pay to clean up after the problems they cause through taxes and straining the economy further, perhaps beyond repair. And the only reason they are able to do this is because they know which way the markets are pointing as long as we have mandates that insure prices will keep rising.

Federal laws that require ethanol and biodiesel be used as fuel forces such a large shift in the direction of grain markets, and subsequently all food markets, that speculators can easily see what no one is supposed to be smart enough to see, which is the direction commodities markets will head. Do you remember the story about how Hillary Clinton, who had no experience in commodities, turned a $1000 into an easy $100,000 through a series of cattle futures trades? There was an outcry of foul play over her easy money making adventure because that’s just not the way commodities work, not even for people who are experts in a particular commodity.

Predictable markets are broken markets

There have always been speculators in commodities but they don’t make a lot of money at it because they are so unpredictable. The people commodities futures were designed for are actually involved in the production and or sales of a particular commodity and use derivatives contracts as a hedge against “future” losses. If a farmer grows corn hoping the price will be within a certain range at harvest time so he can’t pay off his debtors and turn a profit, he may place a bet that the price will drop. This way if it does, his winnings from the derivative contract will cover the loss he took on his actual crop. But with federal mandates forcing grain prices to keep rising, it attracts billions of extra dollars into commodities markets from hedge funds and big banks who have nothing to do with production and sales in those markets. This causes prices to skyrocket to unrealistic highs. So if they drop the biofuel mandate, speculators will be forced out of grain markets so prices can drop back to realistic levels, which will be higher than before the ethanol mandate went into effect, but nowhere near as high as they are now.

No change without ending mandates

This is what happens when governments start messing with free markets. Commodity markets are never supposed to be a sure thing, that's why they exist, to bring stability to unpredictable markets. Thy work until the government steps in and makes them so predictable that people who have no interest in a particular market can see clearly where it is going and invest billions to insure that it does. This distorts market prices beyond the normal dictates of supply and demand in the effected markets. You can argue until the cows come home about every other aspect of this debate. But nothing will change unless the EPA mandate is dropped

Bobby, i appreciate where you are headed and your reasoning; and i am here to tell you the extreme investment money flow has made grain marketing, grain origination, grain merchandising, and overall risk management more challenging; at least from my country elevator perspective. but sadly regardless of whether the rfs is changed or not, once the investors figured out that ag commidities were a cheaper investment, lower risk, and high return as compared to financials and equities it seems we are going to have to live with them and change our approach accordingly.

Another thing to people need to keep in mind when criticizing the ethanol industry is that they also return a portion of the corn they grind back to the livestock industry for feed in the form of distillers grain. Distillers grain is 3 times higher in protein, energy, and phosphorus than corn and sold back to the livestock industry at a CHEAPER price than corn. Last year the ethanol industry returned 12.2% (or about 1.5 billion bushels) of corn back to livestock industry as feed. Due to feeding properties of distillers grain cattle producers are able to utilize cheaper and lower quality forages in their rations creating a diet that is much cheaper than the traditional “corn based” ration that also results in most times better cattle performance. I raise both cattle and corn, my corn is sold at the local ethanol plant where I get distillers grain back for feed. My cost of gains have been greatly reduced and my cattle performance is better than ever. If that plant closes I lose a market for my corn and I lose a competitive advantage to my cattle operation.

Your point about livestock use of distillers and price of is flawed because you are assuming that the current price for corn would be the same irregardless of the newer inflated value after additional demand due to ethanol.

The article clearly shows the uncertainties associated with the RFS mandate at varying oil price levels and corn production levels. The Soviets and Cubans have proven to the world that micro-managing markets is counterproductive. So, lift the mandate and let the markets dictate how much ethanol is used.